Wednesday, April 16, 2008

Euro over U.S. Dollar

The dollar sank to an all-time low against the euro Wednesday with U.S. inflation coming in three times as high as expected in March, on top of escalating food and energy prices.

The euro has climbed to record highs against the U.S. dollar after worse than expected inflation data.

Inflation also rose overseas and the euro reached $1.5966 after the EU's statistical agency Eurostat said that annual inflation rose on higher prices for transport fuel, heating, dairy products and bread. It was the quickest rise in 16 years.

The euro surpassed its previous record of $1.5912 set on April 10. It then fell back slightly to $1.5948, still well above the $1.5790 it bought in New York late Tuesday.

The euro rose because inflation overseas will likely muffle calls for the European Central Bank to lower its interest rate from four percent. The bank's primary mission is to combat inflation.

Lower interest rates can weigh on a nation's currency as traders transfer funds to countries where they can earn better returns, while higher rates are used to curb inflation.

The British pound, which slipped Tuesday on a series of dour economic reports, climbed to $1.9762 from $1.9619.

The dollar slipped to 100.84 Japanese yen from 102.04 yen following reports in the media that Merrill Lynch & Co. will announce $6 billion to $8 billion in new write-downs Thursday. The Wall Street Journal said Merrill's expected write-downs would bring the total since October to more than $30 billion and would mean the company's third straight quarterly net loss.

On Tuesday, the U.S. Labor Department reported that wholesale prices rose by 1.1 percent last month, while analysts had been expecting 0.4 percent.

The Federal Reserve has been cutting interest rates in an effort to combat the economic slowdown. If inflation keeps increasing, the Fed might be forced to stop cutting interest rates for fear that it would make inflation worse, but the slowing U.S. economy could ease those pressures.